Friday, November 15, 2013

World leaders are beginning to understand and accept
that current levels of economic inequality are unsustainable, argues
Stewart Lansley. Without a shift in course, economic turbulence will
follow, as will global-level political discontent and social unrest.

By
Stewart Lansley
for ISN

According to the World Economic Forum
and others, rising inequality is the most significant challenge facing
the globe over the next decade. Inequality – or ‘severe economic
disparities` as the Forum defines it - has been rising on political and
economic agendas. According to President Obama, it is now the ‘defining
issue of our time`.

Over the last two decades, inequality has risen
in three-quarters of the 34 member-states of the OECD. In both the
United States and the United Kingdom, inequality, as measured by the
share of national income accruing to the top one per cent of the
population, has risen to levels last seen before the Second World War.
Driving these widening disparities has been an uneven distribution of
the fruits of economic growth. In the United States – the most extreme
case – nearly all the gains from rising prosperity since the mid-1970s
have gone to the top one per cent, which has left those on middle and
low wages with stagnant real earnings. This pattern has been repeated
elsewhere. Today, the aggregate incomes of the world’s top 1.75 percent
of earners exceed the combined total of those of the bottom 77 percent.

Until the financial crisis of 2008, the growth of inequality barely
registered on the political agenda. Indeed, the economic orthodoxy of
the last thirty years maintained that inequality was a necessary
byproduct of economic efficiency. Societies, it was argued, can either
have greater equality or a stronger economy – they cannot have both.
Embedded in the Anglo-Saxon model of liberal capitalism, this theory
justifies sharper concentrations at the top of income and wealth
distributions.

That orthodoxy, however, is under serious challenge. There is now
considerable evidence to suggest that allowing a small financial and
corporate elite to colonize a rising share of national incomes has had a
mostly negative impact on economic stability, social cohesion and
political trust.

An impending political crisis?
A consequence of the uneven distribution of the fruits of economic
growth has been the reversal of one of the most enduring social trends
of the twentieth century. After decades of stagnant wages and
opportunities, the size of the American middle class – or the group
straddling the mid-point of the income distribution – has decreased by
more than a quarter since the late 1970s. The same squeeze on the middle
is now underway across much of the rich world, from the UK to Germany.

Both the United States and the United Kingdom – where these trends
began – have become low-wage economies, with a quarter of US and a fifth
of UK workers earning less than two-thirds of median earnings. This has
increased levels of in-work poverty and raised the costs of state
income support while today’s generation is facing bleaker life chances
than their parents.

The implosion of the middle is also becoming a key source of growing
social anxiety. Political theorists have long concluded that a large and
successful middle class is essential to stability, a vibrant democracy
and the promotion of political rights. The US economist, William
Easterly, has shown
how the middle-income share affects key social indicators such as life
expectancy, infant mortality and health outcomes. Elite-dominated
societies, Easterly adds, have invested less in human and infrastructure
capital for society at large because of a ‘fear of empowering groups
outside [its] own class.’ If the middle continues to shrink, and
opportunities stagnate or fall, distrust in institutions – already low
in many countries – is likely to grow, ultimately posing a threat to
democracy itself.

Rising inequality is associated with higher levels of political protest and social distrust. According to a study of social risk
by the International Labour Office, more than a half of the 106
countries they surveyed showed a growing risk of social unrest and
discontent between 2010 and 2011, a trend they attributed to rising
unemployment and inequality. Countries which have delivered inclusive
growth have much better records on social and political disturbance than
those where the gains have been concentrated among small privileged
groups. China, for example, has seen a significant increase in
work-place strikes and general protest, fuelling fears of large-scale
unrest among those left out of the country’s long boom. In response, the
authorities have built a massive security network, spending more on
internal security than it does on its military.

Contributing to this malaise is another side-effect of the process of
upward enrichment. A skewed concentration of wealth results in
political systems that disproportionately serve the interests of wealthy
elites rather than those of employees, consumers and savers. Such
polarization risks undermining democratic processes, as citizens lose
trust in the ability of government to protect their interests and
security.

Today’s global leaders appear increasingly unable to engineer the
change that majority opinion now accepts is critical to a more robust
political and economic future. The mechanisms that might secure change –
boardrooms steering surpluses to productive use, caps on corporate pay,
and tighter regulations on Wall Street and the City – have remained
elusive. As the American historian, John Buenker, has argued, ‘With
globalization, outsourcing, off-shore schemes, and ‘free trade’
agreements, today’s “masters of the universe” operate virtually beyond
the reach of even the most progressive of governments.’

One of the greatest risks posed by excessive levels of inequality is
to economic stability. There is now a growing consensus that inequality
played at least some role in the 2008 financial crisis. According to
economic orthodoxy, the shift in the distribution of national income
away from wages and towards profits should have improved national
economic health. Instead, by creating a number of damaging distortions –
including fractured demand, debt-fuelled consumption and heightened
economic risk – it has bred fragility and decreased growth. According to the International Labour Organisation,
nearly all large economies – including the UK and the US – are
‘wage-led’ rather than ‘profit-led`. That is, they experience slower
growth when an excessive share of output is colonised by profits.

The wage-profit imbalance also helps to explain the prolonged nature
of the post-2008 crisis. While living standards have been falling,
corporate cash reserves have soared. American corporations have $1.45
trillion in cash, equivalent to more than 10 per cent of the American
economy. This represents an all-time high and is an increase of more
than 50 per cent since 2010. The same trends can be observed in the UK
and parts of continental Europe. These extensive corporate cash reserves
are the ‘savings glut’ that is at the root of so many of the world’s
macroeconomic imbalances. They mean that a large portion of the world’s
wealth is not being used to launch a sustained economic recovery.
Instead, most of it is lying idle – ‘dead money` in the phrase of Mark
Carney, the Governor of the Bank of England.

Is the message getting through?
Belatedly, it is now being accepted at the highest levels that the
current extent of income inequality is unsustainable. ‘When middle-class
families can no longer afford to buy the goods and services that
businesses are selling, it drags down the entire economy from top to
bottom,’ or so argued President Obama more than a year ago. Christine
Lagarde, head of the IMF, has similarly argued that economic stability and sustained growth depend on securing a ‘more equal distribution`.

Despite these high-profile conversions, the best evidence is that
inequality (at least within nations) has intensified through the crisis.
In the US, 90 per cent of the proceeds of growth in 2010 accrued to the
top one per cent. According to the ILO, the gap between wage and output growth across rich nations has continued to widen since 2008.

Some commentators are saying that the wage-output imbalance may be here to stay. The American academic, Len Kenworthy has argued
that the post-1980 relationship between wage and output growth - with
profit growth outdistancing wage growth - is likely to be the ‘new
normal` rather than a temporary blip.
It is a view shared by the conservative American economist Tyler Cowen. In his latest book, Average is Over,
Cowen argues that little can be done to prevent the further hollowing
out of wages, leading to continuing polarization between the affluent
and the poor. If these experts are right, the likelihood is that much of
the globe should prepare for a future of continued economic turbulence,
spreading social unrest and growing political discontent.

Stewart Lansley is a visiting fellow at Bristol University and the author of The Cost of Inequality and with Howard Reed, How to Boost the Wage Share.

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